The NBFC factor in the slowdown of the automobile sector

The IL&FS headquarters in Mumbai. The revelation in 2018 of the crisis of liquidity that the non-banking financial company was facing triggered panic and prompted other NBFCs to tighten their lending norms.

T he crisis in the non-banking financial companies (NBFC) is perhaps among the most important factors impacting the automobile sector. As major financiers for vehicle buyers, these lending companies are crucial for the automobile sector because they generate sales. Beginning with the IL&FS Financial Services debacle in 2018, and more recently the solvency issues of four large NBFCs, this wing of the financial sector has taken a massive beating and the ramifications are being felt in three major sectors—infrastructure, real estate and automobile.

That apart, a sluggish market and a general sentiment that the economy is not looking good are also responsible for the current situation, industry analysts say. The mood is negative, and the situation does not seem to be improving even with the approach of the festival season.

In a report titled “Understanding the Auto Slowdown”, State Bank of India’s chief economist Soumya Kanti Ghosh says the NBFC factor is responsible for 30 per cent of the problem in the automobile sector. “NBFCs were the major financiers for customers who do not approach banks; hence, revival of lending by NBFCs is also critical,” he says. The report, which was made available to this magazine, says: “It seems there has been a constellation of factors in explaining the decline in automobile sales but declining rural demand and liquidity issues explain 50 per cent of the reason for such a fall.”

The problem is that many automobile manufacturers are also in the NBFC space. The Tatas have Tata Motor Finance Limited, while Bajaj Auto has Bajaj Finance. These NBFCs are disproportionately exposed. Therefore, when a downturn takes place, in this case manifested in a drying up of liquidity, it is a double whammy for the automobile company, said Chetan Pandey, a consultant for ICICI Prudential, which works closely with NBFCs.

According to the Society for Indian Automobile Manufacturers (SIAM), the NBFC segment currently finances almost 70 per cent of new two-wheelers and 60 per cent of new commercial vehicles in the country. SIAM, which has been urging the government to address the problem, says that the liquidity crisis in the NBFC sector and the increase in interest rates had hit vehicle financing, particularly in the rural areas. This is a major cause of the decline in vehicle sales across the board.

The problem began almost a year ago when the financial behemoth IL&FS began defaulting on payments. A pivotal NBFC, IL&FS revealed that its outstanding loans amounted to a staggering Rs.91,000 crore and this set off a panic. Banks and mutual funds, which are heavy lenders to NBFCs, cut off funds, leaving many finance companies with a liquidity crunch. Consumers across the board, whether in housing or automobiles, were affected.

Pandey said: “It has been a year [since the IL&FS scare] and the government has done nothing to sort out the NBFC issue. By now it should have put some checks and measures in place to help build confidence in the market, but it is clueless. Although liquidity is just part of the problem, it is a significant component of the decline in three major sectors of our economy.”

Essentially, three years ago, the NBFCs stepped into a space vacated by public sector banks. The automobile industry was seen as a robust sector, and several NBFCs rushed in to provide finance. Pandey said it worked for some time because of the bubble created by the financial sector. However, when the IL&FS crisis began to unravel and other companies went belly-up, the flaw in the NBFC system surfaced, causing irreparable damage to this sector. Now, NBFCs have tightened lending norms, leading to a decline in sales with loans not easily available anymore.

The NBFCs also finance dealerships, and dealers became stuck with stock once demand dropped. This in turn led to poor recovery of loans extended by NBFCs.

A recent report by ICICI Securities paints a grim picture of the beleaguered financial service companies. It says debt markets have remained hostile to NBFCs since the surfacing of the liquidity crisis in September 2019. Banks did come to the rescue of some NBFCs, the ones with either strong parentage or longer vintage. But now even banks are extra cautious. Analysts say future disbursements will depend on infusion of funds, but no one knows when that will happen. An unfortunate situation for an industry that helps keep the economy in motion.